Another Palestinian fighter was also killed in the raid.
Al Jazeera's Wael al-Dahduh said that the Israeli incursion into east Khan Younis and Rafah in the southern Gaza Strip was on a wide scale.
"The Israeli military vehicles are still deployed in this area where clashes have erupted between Palestinian resistance fighters and Israeli soldiers who took roof top positions on a number of houses, turning them into military barracks," al-Dahduh said.
"Israeli bulldozers, backed by tanks and helicopters, have also started demolishing lands in the raided area," he said.
The violence came hours before George Bush, the US president, arrived in Israel for a three-day visit.
Truce talks
The fighting has clouded Egyptian efforts to mediate a ceasefire between Israel and Gaza's Hamas rulers.
Hamas said on Wednesday it will go to Egypt to discuss a Gaza Strip truce.
Ayman Taha, a spokesman for Gaza's Islamic Hamas rulers, said that Omar Sulieman, the Egyptian mediator, had invited Hamas officials to hear Israel's response to a proposed Egyptian truce deal on Sunday.
Suleiman, who has been trying for months to clinch a truce between Israel and Gaza's rulers, was in Israel this week to discuss the truce efforts.
Hamas and Israel have each put forward tough conditions for a truce to occur.